What is Asset Allocation?

What is asset allocation?

Asset allocation is about not putting all your eggs in one basket. It is a systematic approach to diversification that can help you determine the most efficient mix of assets based on your risk tolerance and time horizon.

What asset allocation seeks is to manage investment risk by diversifying a portfolio among the major asset classes (stocks, bonds, and cash alternatives). Each one has a different level of risk and potential return. At any given point, one asset may be increasing in value while another may be decreasing. Diversification is a way to help manage investment risk. And although asset allocation and diversification do not guarantee a profit or protect against a loss, it can help cushion the blow when one asset class drops in value.

You may protect your portfolio from a major loss from a single asset and ride out market fluctuations by dividing your assets this way. It is also important to understand the risk versus the return trade off—the greater the potential return, the greater the risk.

As a result, your portfolio should be based on your risk tolerance. Generally, you should not place all your assets in those categories that have the highest potential for gain if you are concerned about the prospect of a loss. It is essential to find a balance of asset classes with the highest potential return for your risk profile.

Other important factors to consider creating an asset allocation strategy are investment goals and time horizon. Ask yourself: what do I want to accomplish? Do you want to buy a new house or car soon? Do you want to pay for your children’s college education? When you retire, do you aspire to travel or buy a vacation home? You should consider all your aspirations when outlining an asset allocation strategy.

If you would like to learn more about asset allocation, click here, or for a more personal assessment to see what’s best for you, call our office at 201-342-3300. One of our associates will be happy to take your